Standard Chartered Bank v. DDIT ITA No. 3827/Mum./2006 Article 7, 12 of India Singapore DTAA Section 195 of Income-tax Act A.Y.: 2004-05. Dated: 11-5-2011

• Data processing charges do not constitute ‘royalty’ under the Income-tax Act as also India-Singapore DTAA. Payments are made for use of a facility and not for any process/use of equipment and hence it is not royalty.
• In the absence of control or physical access to any equipment, it cannot be said that the payment was made for any ‘use’ or ‘right to use’ the equipment.

Facts:

• The taxpayer (SCB), a non-resident company, is engaged in the banking business in India through various branches. It entered into an agreement with a Singapore company (SingCo) for providing data processing support from outside India. The agreement required SingCo to make available disc storage capacity in its data centre for exclusive use of SCB.
• The arrangement involved electronic transmission of raw data by SCB and electronic processing of such data by SingCo as per SCB’s requirements. Processed data is electronically transmitted back to India in the form of reports as per specifications of SCB.
• SCB claimed that (i) charges paid to SingCo did not amount to royalty under the IT Act as well as under Article 12 of DTAA (ii) Payments were in the nature of business profits which, in absence of PE in India, were not taxable.
• In response to SCB’s application for ‘nil’ tax withholding, the Tax Authority held that the payment constituted ‘royalty’ under Incometax Act as well as DTAA.
• On appeal, the first Appellant Authority upheld the Tax Authority’s order and concluded that the payments were made (a) for use of ‘process’ provided by SingCo through its computer facility for data processing; or (b) for use of ‘scientific equipment’ since the arrangement was for renting out disc space in the hardware system, over which SCB exercised constructive control over infrastructure facilities and such facilities were for exclusive use of SCB.

Held:

• For the following reasons, the ITAT held that the payment was not for use or right touse ‘any process’ within the meaning of Article 12(3)(a) of India-Singapore DTAA.
• There was no use or right to use any process of SingCo by SCB at any of the stages, i.e., transmission of raw data, processing of data by SingCo staff and electronic transmission of duly processed output data by SingCo to SCB.
• The consideration paid by SCB cannot be said to be for the software embedded in the mainframe computer of SingCo.
• In Kotak Mahindra Primus Ltd. v. DCIT, (105 TTJ 578), Mumbai, the ITAT had held that payments made for specialised data processing of raw data using mainframe computers located abroad is not liable to tax as royalty since there was no control over the actual processing of data and there was no physical access or control over themainframe computer. This decision squarely applied to the facts of the case.
• The payment was for a facility which was available to any person willing to use it.
• For the following reasons, the ITAT held that the payment was not royalty for equipment hire as there was no use or right to use any equipment.
• Earmarking a space segment capacity of the equipment does not result in possession (actual or constructive) of the equipment being provided.
• The context and collocation of the two expressions ‘use’ and ‘right to use’ followed by the word ‘equipment’ indicate that there must be some positive act of utilisation, application or employment of equipment for the desired purpose.
• If an advantage was taken from sophisticated equipment installed and provided by another, it could not be said that the recipient/customer used the equipment as such.
• What was contemplated by the word ‘use’ in royalty definition was that the customer came face to face with the equipment, operated it or controlled its functions in some manner. Availing services which involved use of infrastructure is not royalty.